The Real Estate Family Office: Exploring the History and Context of the Modern Real Estate Family Office
Authored by Gavin Reiff, Vice President at Richter, supported by Richter’s Real Estate Advisory, Richter Family Office, Tax, and Audit and Assurance teams of experts.
As originally appearing in Espace Montreal, volume 31, #3, 2022.
Series Introduction – Article Installment No.1
Welcome to the first installment of a series of articles exploring the private Real Estate Family Office and its role in providing governance and professional management for muti-generational assets.
This series shall begin with the history, context, and application of a private Family Office prior to defining the enterprise in its current form. The discussion will extend toward the intersection between the Family Office and Real Estate, wherein we shall explore specific considerations associated with managing real estate interests within a private enterprise. Topics shall range from the accumulation of assets and establishing long-term strategy to investment and asset management, tax considerations, corporate and organizational structure, governance considerations and vital safeguards.
We hope you enjoy reading this series as much as our team did in researching, collaborating, and sharing our Real Estate Advisory collective experiences.
Evolution of Investible Assets and Supporting Institutions
Commonalities between the physical history of our planet and the people who inhabit it, are change and adaptation. Humanity first flourished as indigenous and nomadic hunter/gatherers whereby all productivity was directed to meet the necessities of nourishment, shelter, and security. With the acquired knowledge of agricultural cultivation, humans adapted their social structures toward permanent settlements and construction of durable assets where such communities benefitted from specialization and trade.
Notwithstanding the organic nature of establishing early settlements, with features that include permanent structures and population base, such socio-economic and subsistence activities were the forerunners to cities as we know them today.
Through layering knowledge and experience, today we can re-shape landscapes, inhabit densely populated regions, and occupy structures designed for comfort, purpose, and aesthetic.
Within a single millennium we have advanced engineering design and construction techniques that produced two-level structures made from fragments of naturally occurring materials, to finely designed structures approaching a kilometer in height made from materials engineered for exact performance. We can ski indoors in a desert region and conduct scientific experiments in hyper-controlled environments that mirror the conditions of space.
History, Definition, and Purpose of a FO
In lockstep, management practices and organizational structures have evolved to manage increasingly sophisticated assets at scale and navigate the broader regulatory environment. The private Family Office is one organizational structure that has emerged and become entrenched over the last two centuries of advanced economic activity and early-stage wealth-based family dynasties.
Widely credited to the Rothchild, J.P. Morgan, and J.D. Rockefeller families in the mid to late nineteenth century, the first private Family Offices were established to manage their vast financial and business interests. These Family Offices were established during the industrial revolution, when manufacturing capacity expanded in orders of magnitude, and when communication technology and transportation routes became more reliable and cost effective. Businesses were able to capture larger proportions of bigger markets. The early entrepreneurs who took advantage of this unique period benefitted by amassing fortunes so vast that their family names became a colloquial part of dialogue. As a matter of interest, J.D. Rockefeller had amassed a fortune of $1.4B USD by the time he passed, equivalent to over $255B USD today.
The sheer size of that family-owned capital base necessitated a new approach. A dedicated professional management team and structure created to support the capital base formed the basis of the first private Family Office. The core asset may be an economic interest in an operating company, or capital generated from the sale or liquidation event connected to the company. Today, it is estimated that over ten-thousand Family Offices have been established globally, with ultra-high net worth individuals managing over $74T USD in assets, while collectively making them highly influential in the investment and asset management markets.
There is a range of accepted definitions for a Family Office, yet each is underpinned by concepts of establishing a coordinated and efficient professional management platform, responsible for setting long-term strategies and stewarding generational assets. The Family Office will also engage in related decisions and activities such as wealth transfer, tax planning, risk-management, and philanthropy. Additionally, the entity may perform ongoing operational functions such as cash management, reporting, tax filing, and organizational functions.
To illustrate the concept, imagine a privately held operating business, managed by a team of dedicated professionals, that may include a CEO, CFO, COO, and CIO and their respective teams. The executive team is responsible for formulating and executing business strategy while maintaining and enhancing operations and long-term viability of the business. A private entity may include certain individuals have an equity interest in the business irrespective of whether they act in a managerial capacity.
Let us widen our lens and examine the financial interest of the equity owners. In addition to their interest in the operating business, they likely have economic interests in an investment portfolio, life insurance policies, philanthropic entities, and real estate. At a certain concentration of wealth stored within various assets, the affairs of the equity owners become complex and the expense of establishing a coordinated actively managed professional platform is greatly offset by the efficiencies and value enhancements gained operating a Family Office. It operates in a similar capacity to an operating business, with the mandate to oversee the broader set of assets, supported by professionals with measurable goals, objectives, and formal structure.
The Real Estate Family Office manages the strategic continuity of family interests, the diverse needs and roles in the family real estate assets, and the challenge of divisive interests and potential discord that arises from the diverse priorities and personalities of subsequent generations.
The Real Estate Family Office – Real Estate Core Asset
Private Family Offices are built around the multi-generational carriage of core assets. Of particular interest herein is the core asset being real estate or a portfolio of real estate assets. This is where our discussion turns to the nuances of managing a Real Estate Family Office.
Real estate assets could be accumulated actively, whereby the operating business is focused on the acquisition and management of real estate, or passively, whereby assets are accumulated tangentially through other business interests. For example, the manufacturer or distributor of hard goods may own the real estate (industrial space for warehousing, office space for operations) associated with their primary business operation. A doctor may own the building where the medical practice operates. Often, prior generations acquired real estate assets in a slow and methodical manner as an investment, a diversification and inflation-protection tool.
The Real Estate Family Office – Attributes & Implications
The wisdom and foresight, or good timing and opportunity, of prior generations to acquire real estate assets is fortuitous for current and future generations. Those actions endowed the Family Office’s balance sheet with real estate being the predominate asset. By nature, real estate is tangible, long-lived, and generates regularly recurring income. On the downside, real estate assets are fixed in position, illiquid, indivisible, require periodic capital-intensive attention, and lengthy durations to alter or reposition. As the size of the portfolio increases, the benefits and challenges of managing the assets increase proportionally. There is more at stake with higher cash flows generated by the assets, greater capital requirements to maintain or reposition the assets, enhanced financial and structural complexity. There are simply more dollars at risk and, in many cases, more points of view to consider.
Managing a portfolio of private real estate assets requires active management to preserve and enhance its physical form and economic viability. The management team must be skilled, experienced, and supported by the stakeholders to drive economic performance. As we continue this series, we will explore how the private Real Estate Family Office is well positioned to deliver critical services that include: strategic planning, investment and portfolio construction, asset management, operational management, leasing, finance, reporting, and cash flow management, governance, corporate and asset level investment structure.
About the Real Estate Family Office series
This series of articles explores the intersection between the management of private Real Estate and role of the Family Office plays in the governance and professional management of such durable assets.
Our real estate advisory, business, and family office experts have collaborated to provide their insights on certain topics ranging from establishing investment strategies, tax considerations, governance considerations, to asset management.